Director Kickbacks
Adams Stirling PLC
  California's Leader in Community Association Law November 8, 2020

Kickbacks. Members are hearing that our president is receiving kickbacks from our contractors. Can we remove him from the board? What other steps can homeowners take? –Nancy W.

RESPONSE: A rumor of kickbacks does not mean they are occurring. It could be that someone is trying to smear a director's name. Even so, an investigation is required.

Board Investigation. If there are allegations of kickbacks, board members have a fiduciary duty to investigate and take appropriate action. If the investigation finds that the rumors are false, the board should clear the director's name.

Censure and Removal. If the investigation reveals the president is receiving kickbacks, the board should censure the president, remove him as president, and demand his resignation from the board. If the director refuses, the board can set a date for a special meeting of the membership to remove him from the board. To initiate the process, an inspector of elections is appointed and notice sent to the membership along with ballots. If the board refuses to take action, 5% of the membership should submit a petition to remove the director or the entire board.

RECOMMENDATION: The board should get legal counsel involved on how best to conduct the investigation and recommend appropriate actions based on the findings. Management should verify that the association has crime insurance in place (also known as a fidelity bond) in the event the investigation reveals embezzlement of HOA funds in addition to kickbacks.


QUESTION: If a roof leak (association responsibility) damages a unit's drywall and newly remodeled kitchen, does the association have any responsibility besides fixing the leak? –Jean N.

RESPONSE: Yes, the association has some responsibility but the extent depends on the circumstances.

Common Area Drywall. In almost all CC&Rs, the drywall on perimeter walls is deemed common area. And, unless the governing documents state otherwise, the association is obligated to repair and replace common areas. (Civ. Code §4775(a)(1).) This is true whether or not the association was negligent related to the roof leak. That means the association is responsible for repairing/replacing damaged drywall on perimeter walls and ceilings.

Unit Improvements. Since unit improvements (cabinets and counters, hardwood floors, interior walls, etc.) are part of the unit and not common area, the owner is responsible to maintain, repair and replace them. (Civ. Code §4775(a)(2).)

Negligence. If the roof leak was not due to the association's
negligence, each side repairs the damage for which it is responsible. If the association were negligent (the board was on notice there were problems with the roofs), the association will be liable for the damage. Another consideration is insurance. Does the owner have insurance and what does the association's insurance cover?

RECOMMENDATION: Associations should amend their CC&Rs to require all owners to carry their own insurance. This helps to ensure repairs can be made in the event a loss occurs.

In response to an EPA and California Regional Water Quality Control Board order, San Francisco's East Bay Municipal Utility District (EBMUD) enacted an EBMUD Consolidated Regional Private Sewer Lateral Ordinance intended to fix old, cracked sanitary sewer pipes.

Inspections. Under this ordinance, associations must have their lateral lines inspected, repaired or replaced if necessary, and obtain a compliance certificate from EBMUD.

Verification Test. All associations in the affected areas will need to hire a plumber to inspect their lateral lines and complete any necessary repairs or replacements. Once that is done, they must schedule a verification test and obtain a compliance certificate from EBMUD.

Deadlines. Associations responsible for less than 1,000 feet of sewer lines must complete this process by 7/12/21. Associations responsible for more than 1,000 feet must complete this process by 7/12/26. Deadlines vary depending on when the development was constructed.

Affected Areas.
Alameda, Albany, Emeryville, Oakland, Piedmont, Kensington, El Cerrito, and Richmond Annex. The City of Berkeley has its own program, which can be found here: City of Berkeley Compliance Guide. More detailed information can be found on our website at "East Bay Sewer Lateral Ordinance."

Thank you to attorney Megan Hall for her research on this issue.
We are pleased to announce that Senior Attorney Rob Ward joined our firm. Rob is an experienced HOA attorney, having served both as a litigator and general counsel to boards of directors for over 22 years.

Active in Industry. Rob is active in our industry as a speaker and writer on matters affecting associations. He is also involved in monitoring legislation affecting common interest developments and recently served as a delegate to CAI's Legislative Action Committee.

Counsel to Associations.
Rob has litigated complex matters for homeowner associations throughout California and Nevada, helping to recover over $200 Million in settlements and judgments. He handled disputes involving product liability, misrepresentation, landlord/tenant disputes, and residential construction defects. In addition, Rob has advised homeowner association boards on general legal matters, including governing document amendments, rules and policy updates, and community association disputes.

We welcome such an experienced attorney into our firm. If your association needs legal services, contact us for more information.


HOA Taxes. I read your most recent newsletter about income taxes and IRS audits. I have been involved in over 30 IRS audits and all of them were of associations that used Form 1120. In those more than 30 IRS audits of Form 1120, the IRS never made nor proposed making any adjustment(s) to the Form 1120 as filed. In each instance, the association’s membership approved the IRS Revenue Ruling 70-604 and a budget existed showing what the budgeted transfers to reserves were. I guess the dilemma will need to be decided by a higher authority. -William S. Erlanger, CPA, Levy, Erlanger & Company

RESPONSE: I received feedback from CPAs expressing differing opinions about excess income resolutions per Revenue Ruling 70-604. It's interesting that this 50-year-old ruling still generates uncertainty and disagreement.

Leaky Shower Pan #1. If the shower pan is part of the unit and the board can force an owner to repair the leaky shower pan because of damage to the downstairs unit, doesn't it also hold that a board can/should force an owner to perform maintenance on upstairs unit floors for reasons of noise abatement? -Michele J.

RESPONSE: Yes, boards can require noise abatement using the nuisance provision of the CC&Rs. See Hardwood Floor Violation.

Leaky Shower Pan #2. In our condo, the leak under the shower turned out to be the drain line, not the pan. We were told that that is the usual source of shower leaks, not the pan. Not a difficult fix for an experienced plumber. The access for this is through the ceiling of the unit below. -Bebe

NEWSLETTERS. Readers can find current year and prior year newsletters posted here. Older newsletters are not posted since the information they contain can change over time with new statutes and case law. The website itself is kept updated with current information which can be found via the "Index" or through our website's "Google Search."

Statewide Updates: The following Counties have changed Tiers: Colusa (Red Tier to Orange); Plumas (Yellow Tier to Orange); San Mateo (Red Tier to Orange); Shasta (Red Tier to Purple).

NorCal Counties. Contra Costa County issued new Orders due to a rise in cases. The Sporting Events Order limits spectators at professional or college games to 25 people from no more than 3 households. The Health Order prohibits outdoor bars without food service; limits indoor dining to 25% or 100 people, whichever is fewer; limits indoor movie theaters to 25% or 100 people, whichever is less; limits religious services indoors to 25% or 100 people, whichever is less; prohibits indoor cardrooms and satellite wagering sites. Contra Costa issued an 11/5/20 Press Release regarding a mass COVID-19 testing event on November 7, 2020.

Fresno County issued a Guide to Reopen K-12 Schools and School Reopening Attestation.  

Lake County issued an 11/5/20 Press Release regarding November free drive-thru flu vaccine events.

Marin County provided an update to Appendix C-1.

Mendocino County issued new Guidance for Outdoor Gatherings and issued a new Order intended to implement the State guidance for private gatherings.

Nevada County issued an 11/4/20 Press Release regarding the risk that they may be moving back to the Red Tier based on their recent rise in cases.

San Francisco County has a new Order that provides specifics to businesses on how to reopen. San Francisco is requiring businesses to meet ventilation requirements. The County is allowing indoor dining at museums to open at 25% for each room, up to 100 people. In-person real estate showings are allowed by appointment. Drive-in gatherings with up to 6 performers are allowed. Indoor and outdoor film production is expanded to 25 people.

San Mateo moved to the Orange Tier.

Shasta County has moved to the Purple Tier; as a result, by 11/6: restaurants, museums, zoos, aquariums, places of worship, movie theaters, gyms and fitness centers, wineries, family entertainment centers and cardrooms can only be open outdoors; retail and shopping centers can open indoors at 25% capacity.

Solano County issued a 10/29/20 Press Release indicating their first flu and COVID-19 co-infection case. A 10/30/20 Press Release indicates that the County is at risk of moving to the Purple Tier and urges residents to reduce the spread.

Stanislaus County issued an 11/5/20 Press Release indicating that the County was at risk of moving to the Purple Tier and encouraging residents to take action to prevent this move.

Tehama County issued a 10/3/20 Announcement that contact tracing has identified a potential source of exposure at the Round Up Saloon from 10/16-10/18. The County also issued School Guidance FAQs.

Yolo County issued an 11/4/20 Press Release urging residents to exercise caution as the County may be moving to the Purple Tier.

SoCal Counties. The City of Los Angeles amended its Safer LA Order to align with state guidelines for private gatherings. Also removed closure for outdoor playgrounds and indoor malls and shopping centers.

Riverside County answered a question as to whether an HOA board meeting of 20-30 can take place. Gatherings are currently not permitted. See Q&A on the COVID-19 site on gatherings: "State public health directives prohibit professional, social and community gatherings. Gatherings are defined as meetings or other events that bring together persons from multiple households at the same time for a shared or group experience in a single room, space, or place such as an auditorium, stadium, arena, large conference room, meeting hall, or other indoor or outdoor space. They pose an especially high danger of transmission and spread of COVID-19."

San Bernardino County released an infographic on how to move from the purple to red tier.

San Diego County amended its health order allowing schools to hold classes under industry guidance by the state. Requires TK-12 bi-weekly reporting of statistics to the San Diego County Office of Education and also that Health Officials be notified immediately of any positive case of COVID-19 and exposed staff and families.

READING THE CHART. Because the chart is large and the text small, you can easily make it larger for viewing by holding down the "Ctrl" key on the left side of your keyboard and then using your finger to scroll forward or backwards with the wheel on your mouse. You will see the text grow larger or smaller as you move the wheel. For a list of county restrictions and links to health department orders, see County Chart 11-6-20. The chart is also posted on our website.

Boards can contact us for friendly,
professional advice.

Adrian J. Adams, Esq.
Founder & Managing Partner
DISCLAIMER. Our newsletter provides commentary based on sketchy information we receive from readers. From time to time, we add a little humor. Some find it amusing. Others are appalled. Some readers are excited when they score free legal advice. Not so. Our newsletter provides commentary only, not legal advice. You need to pay real money for an attorney to review all the facts and give you a legal opinion. We do that too, but you have to hire us. It's okay, we're friendly. Keep in mind we are corporate counsel to California associations only. Ask us for a proposal to represent your association.

Contact us to amend your governing documents to comply with rent restrictions required by AB 3182.

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